On April 1, the Second Circuit largely affirmed the holdings of the district court in the Southern District of New York. The court concluded that despite the evidence that eBay had general knowledge that some of its customers had used its website to sell counterfeit Tiffany merchandise, eBay itself could not be held liable for direct or contributory trademark infringement or for trademark dilution. It remanded the case, however, to determine whether eBay could be held liable for false advertising.

Eric Goldman, who had previously commented on the district court opinion, provides a summary of the Second Circuit’s decision. Larry Downes for the Stanford Law School Center for Internet and Society views the decision “a matter of economic necessity,” arguing that placing the burden on online marketplaces rather than on manufacturers “would effectively mean the end of eBay and sites like it.” Rebecca Tushnet comments on the opinion, focusing on the false advertising holding. Ron Coleman of the Likelihood of Confusion blog provides some additional commentary and criticism.

The Second Circuit first recounted the factual findings of the district court. It took note of the great extent of counterfeit Tiffany sales on eBay. It also acknowledged several anti-counterfeiting measures eBay had adopted in an attempt to eliminate counterfeit merchandise from its web site, including a fraud detection engine, a notice-and-takedown system that allowed intellectual property rights owners to report potentially infringing items to eBay, and its policy of suspending or banning sellers suspected of engaging in repeated infringing conduct. The court then reviewed eBay’s advertising campaigns, which highlighed the availability of Tiffany items on its web site.

The Second Circuit then addressed the legal claims asserted by Tiffany, finding that eBay could not be held liable on either a direct or contributory trademark infringement theory and that it could not be held liable for trademark dilution. In analyzing the direct trademark infringement claim, the court acknowledged the nominative fair use doctrine, which permits a defendant to use a plaintiff’s trademark to identify plaintiff’s goods so long as no likelihood of confusion results as to the source of the product or the trademark holder’s sponsorship or affiliation. Without explicitly adopting this doctrine, the court suggested that eBay was permitted to use Tiffany’s trademarks if doing so was necessary to describe the products and did not imply a false affiliation or endorsement. It then found that eBay’s use of Tiffany’s trademarks satisfied this requirement.

The court analyzed in detail the “more difficult” contributory trademark infringement issue. It cited the Inwood standard for secondary trademark infringement liability, whereby liability is appropriate if a manufacturer or distributor (1) “intentionally induces another to infringe a trademark” or (2) “if it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement.” Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 845 (1982). Following the lead of several other circuits, the Second Circuit found that the Inwood test extends to service providers, such as eBay. Because Tiffany did not argue that eBay induced the sale of counterfeit goods on its site, the court focused only on the second prong but held that it was not met in this case.

The court then rejected Tiffany’s argument that the requisite knowledge under Inwood could be met by showing that eBay had generalized knowledge of sale of counterfeit Tiffany products on its site and concluded that proof of some contemporary knowledge of particular infringing transactions is necessary. The Second Circuit noted that the relevant language in Inwood – that a defendant is liable if it “continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement” – supported a specific rather than a general knowledge requirement. The court rejected the argument that eBay had been willfully blind to the counterfeiting activity, emphasizing that eBay did undertake significant efforts to combat counterfeiting.

The Second Circuit then quickly disposed of the trademark dilution claim, agreeing with the district court’s holding that eBay had never used the Tiffany trademark to refer to its own products and holding that, in absence of such a second mark, there was no dilution.

Finally, the court addressed the false advertising claim. Tiffany argued that eBay had advertised “Tiffany items,” which, given its general knowledge of presence of counterfeit Tiffany merchandise, constituted false advertising. The Second Circuit concluded that statements of this kind were not “literally false” because eBay also offered genuine Tiffany merchandise through its web site. However, it rejected the district court’s conclusion that nominative fair use was a categorical defense to false advertising. The court said that the available record was insufficient to affirm the district court’s conclusion that eBay’s advertisements were unlikely to mislead, and remanded the case to the district court to re-examine the issue in light of its opinion.

The Second Circuit opinion is significant because, although it does not specify a clear standard for contributory trademark infringement, the court squarely rejects the idea that the Inwood “knowledge” requirement can be met by generalized knowledge of a pattern of infringing transactions. Somewhat problematically, however, the court does not specify whether simply instituting a notice-and-takedown scheme similar to that adopted by eBay in this case will be sufficient to avoid liability in future cases.